The community behind the decentralized financial stablecoin protocol Frax Finance has agreed to completely collateralize its native stablecoin Frax (FRAX), putting an end to the network’s previous reliance on algorithmic support.
The governance proposal for FIP-188, which was first posted on February 15 and would reform the collateralization model of FRAX, has now attained a quorum, and according to a snapshot taken on February 23, 98% of those voting have voted in support of the plan.
According to what was said in the proposal, “the moment has come for Frax to progressively eliminate the algorithmic basis of the protocol.”
It was mentioned that the first protocol had a “variable collateral ratio” that changed dependent on the amount of demand there was for the stablecoin in the market. The market would determine the amount of collateral that must be deposited in order for one FRAX to be equivalent to one United States dollar.
The combination of the two models led to the stablecoin having an 80 percent backing by crypto asset collateral while also being partly stabilized by algorithms. This was accomplished by minting and burning its governance token, FXS, which has seen a price increase of 12% over the course of the previous twelve hours.
With a market value of slightly more than one billion dollars, Frax is the sixth most valuable stablecoin in the business.
As soon as the proposal is put into action, the protocol will stop minting any new FXS in an effort to reduce the amount of tokens available and to boost the collateral ratio.
To clarify, the implementation of this proposal does not need the minting of any FXS in order to meet the CR requirement of 100%.
It intends to keep the income generated through the protocol in order to finance the higher collateral ratio, which will involve suspending the repurchase of FXS.
Additionally, it will permit the purchase of up to $3 million worth of Frax Ether (frxETH) every single month in order to raise the collateral ratio. frxETH operates in a manner that is similar to that of a stablecoin, except it is anchored to Ether (ETH) instead. Within the context of the Frax ecosystem, it makes the transfer of Ether liquidity easier to do.
Recently, DeFiLlama published a report on the expansion of frxETH during the course of the previous month.
The decision was made in the midst of what looks to be a greater assault on stablecoins in the aftermath of the disastrous collapse of Terra and Luna that occurred a year ago.
On February 22, the Canadian Securities Administrators released a comprehensive list of additional conditions that must be met by crypto businesses and stablecoin issuers if they want to continue operating lawfully inside the borders of Canada.
The trading of stablecoins was subject to a stringent set of criteria, and algorithmic or non-fiat-backed stablecoins were expressly forbidden by the list in question.